Apple: FYQ2 iPhone Sales to Miss Consensus, Says Susquehanna

By Tiernan Ray

Susquehanna Financial Group semiconductor analyst Christopher Caso, who covers Apple (AAPL) suppliers such as Qualcomm (QCOM) and Broadcom (BRCM), this morning offers an update to the note he put out Monday, in which he claimed that Apple seemed to have cut production rates on the iPhone for the March quarter, Apple’s fiscal Q2, to perhaps 35 million to 40 million units, lower than the 40 million to 45 million he had been expecting in early December.

Despite the cuts in estimates by Citi and others, Caso today thinks that the Street has not fully appreciated the implications of the apparent production cuts, as “it appears that iPhone sell-through for 4Q, Q1 (or both) will miss consensus expectations.”

Caso thinks lower demand is the reason:

In short, we don’t really have visibility about how well iPhone 5 has sold-through to consumers, and given that iPhone is sold in over 90 countries, we’re skeptical about those claiming otherwise. And the cuts were on the order of only 5 mln units, so we don’t think it’s a cause to panic. But we are confident that something did change in the production forecast over the last week, and the most plausible explanation is that demand is below prior expectations.

He goes through an assessment of what might be happening,

Our checks suggest the production cuts were more than just one or two component suppliers who overbuilt inventory. Our production forecast is based on checks that are consistent across a wide range of suppliers. Indeed, we do hear that some excess inventory was built during the quarter. Unfortunately, consensus expectations were based on the 45-50 mln 4Q production forecast that we and others had been seeing for some time. When we met with suppliers in early December, they had expected a production pattern similar to last year, with a very mild sequential decline in 1Q. When we spoke with the same suppliers over the past few days, their view had changed […] In addition, since the cuts occurred before the China launch, we don’t think this had anything to do with China. A strong China launch could help the 1Q build plans improve, but that doesn’t answer the question about what happened during 4Q […] We haven’t seen any signs of a new phone in production either. We did hear some talk about a lower-priced iPhone, which we think could be launched when AAPL refreshes the iPhone 5 (the high screen cost of iPhone 5 could make it difficult to bring that phone into lower price points). But we don’t think a new phone launch explains the recent production cuts […] Often, the most obvious answer is indeed the answer. We think the most obvious answer is that demand has been below Street expectations. Recent price cuts by WMT could possibly support this view. WMT is now offering the iPhone 5 (16Gb) for $127 (normally $189.97) and the iPhone 4S (16Gb) for $47 (normally $87.97) […] This certainly could be an effort by WMT to drive store traffic, and AAPL discounts would be a good vehicle for doing so. But is also could be a sign that WMT has some excess inventory to move, and wishes to do so before Christmas.

Bottom line, it seems to Caso, from a review of last year’s production and sell-through data for the iPhone, that there is no way Apple can meet current expectations for the March quarter:

The data shows that 4Q production was closely in line with sell-through last year (iPhone 4S was launched at about the same point in the calendar as iPhone 5), which meant that they exited 2011 with very little inventory. That caused them to keep production fairly flat Q/Q in 1Q12, and sell-through was only down slightly, due to a strong international launch. The data from this year tells a different story. While we saw a bigger production ramp in 4Q12, consensus expectations are of course higher as well. Consensus now expects sell-through of about 47.5 mln units in 4Q, close to our 49 mln unit production forecast. But consensus is well ahead of our 35-40 mln unit production forecast for 1Q. Based on what we believe has been produced since 3Q12, we don’t see any way that AAPL can meet consensus sell-through numbers in the near term.

Caso provides the following graphic to show how he thinks Apple will miss that Q1 estimate:

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There are 32 comments

DECEMBER 20, 2012 11:49 A.M.

Anonymous wrote:

Perhaps production yields are increasing enough on the iPhone5 to reduce component supply orders...

DECEMBER 20, 2012 11:49 A.M.

Anonymous wrote:

hey Caso, (re: your comment: "Recent price cuts by WMT could possibly support this view. ..") please do us a favor..go out and see if you can find one (and only one) of those WMT $127 iPhones, and when you have found one then please write write an update of this nonsense...otherwise keep your speculative and fictional nonsense to yourself..

DECEMBER 20, 2012 11:53 A.M.

Ottoworks wrote:

Read, reread, reread again, and I'm just not seeing good enough data for this "analysis", especially Caso's Q1 guess. We'll see. I still think the stock is spring loading in the low 500s, and not on a ledge before a further fall.

DECEMBER 20, 2012 11:58 A.M.

Anonymous wrote:

Apple's Q4 did not miss on iPhone sales. iPads were light. Get your basic figures right or don't write at all. Now if you mean calendar q4 your still confusing readers, either way get your stuff right

DECEMBER 20, 2012 11:59 A.M.

Anonymous wrote:

was it not these genius analysts upgrading in Sept??? lol useless info

DECEMBER 20, 2012 12:01 P.M.

Anonymous wrote:

Good approach to analysis. Glad to see someone is being rational here, and not emotionally a bear or bull.
To those who say production yields are better--what do you think, that they were throwing away 10% of screens and chips, and cases, and batteries? Get real.

DECEMBER 20, 2012 12:03 P.M.

ANONYMOUS wrote:

ALL SPECULATION. NOTHING BASED ON FACT. WHICH I PHONE ARE YOU WRITING ABOUT?

DECEMBER 20, 2012 12:08 P.M.

Anonymous wrote:

since when have these analysts gotten anything right. Upgrade at top down grade at bottom seems to be the theme. Friend back from China said there is an iPhone craze, Chinese New Year in Feb???

DECEMBER 20, 2012 12:17 P.M.

Anonymous wrote:

Totally bogus analysis !

DECEMBER 20, 2012 12:22 P.M.

Anonymous wrote:

well, if these guys are always off by a mile and some

DECEMBER 20, 2012 12:23 P.M.

Meaningless_Consensus wrote:

What is "consensus"? Whose "consensus"?

Apple has a forecast for this quarter and that is the official word from the company with all the data.

Analysts "consensus" are worthless because they are either over-optimistic or over-pessimistic. Between 2007 and 2009, the "consensus" was iOS would fail, iPhone "fad" would fade out. That iOS would die because Apple won't license it and that iPhone would not sell because it is too expensive.

Between 2007 and 2010, the "consensus" was that Mac business would fail too because Apple needs to sell a "netbook". That OS/X also needs to be licensed and that Mac's are too expensive.

When iPad came out, there was a loud chorus of how it is just a "big iPhone" and that iPad fad will also die.

Really, folks, what do these analysts know? Except to manipulate the data and analysis for their own gain?

DECEMBER 20, 2012 12:29 P.M.

Jeff wrote:

All of these negative predictions are based on conjecture.
Writing that "It seems . . .", "what might be happening . . ."
"possible shortfall. . ." " he thinks . . ." "seemed to have . . ."
- - and on and on and on is nothing but misleading guesses.

Give it a rest!

DECEMBER 20, 2012 12:31 P.M.

Mike wrote:

Another comment said the analyst should try to get one of those discounted iphones from WalMart. I decided to do so dd and call 2 of my local Walmarts and the result is they have no iphone 5's in stock...not any model at any price. This analyst can go all the way to the Far East to check on components but can't call his local WalMart??? I went to BestBuy the other day and the same result..no iphone 5 in stock, but they could get one in about a week if you paid in advance. Everyone forgets Radio Shack did the same thing a year or two ago with the iphone 4(discounted the iphone $50 to generate traffic).

Everything that has come out that is fact, record sales in the US the first week the iphone 5 was released and record sales in China when it was released there last weekend, indicated explosive growth of the iphone sales and everything that comes out from "checks with suppliers" is cuts in production. Who knows what it'll actually sell next quarter, but It seems pretty amazing that they would cut production when it is sold out everywhere!

All the

DECEMBER 20, 2012 12:36 P.M.

ILoveEricS wrote:

Every time apple comes out of peak production on a new product (ie. 1-2 qtrs after intro), the league of morons come out of the woodwork trying to talk the stock down by pontificating about supplier orders in decline. And every time for the past forever, they have been dead wrong.

DECEMBER 20, 2012 12:38 P.M.

iphone 5S wrote:

Spring or Summer......new iphone or updated, so the orders will be cut for previous....

DECEMBER 20, 2012 12:42 P.M.

RANDY WILHELM wrote:

There is NO way any analyst can accurately predict anything about AAPL anymore, because they are selling all their products in over 100 countries, plus this analyst has no idea when my current contract with AT&T expires, enabling me to go get the latest and greatest IPHONE. And I will be buying another IPHONE as soon as my contract allows me too.

DECEMBER 20, 2012 12:46 P.M.

Wet Paint wrote:

Glad I shorted this pig wehen iPhone 5 Boring came out. Good article.

DECEMBER 20, 2012 12:51 P.M.

KBB wrote:

I can't believe nonsense like this can even be written. Your "facts" are all off. Apple BEAT on iPhone sales in Q4. Where is the accountability in journalism? Hyperbole like what this headline-baiter should be illegal.

DECEMBER 20, 2012 12:54 P.M.

Anonymous wrote:

its official. im calling a boot here. There arr more analysts left on the planet to downgrade pr bash Apple. finally'

Larry knows I never miss. Never. This is office party time. And when it comes to projectile vomit... You're looking at the champ. I can hit a running cat from eleven feet away.

DECEMBER 20, 2012 1:03 P.M.

Horace Dediu wrote:

The table shows production total of 105 million in 2011 (three quarters shown) and shipments of 89.2. With production far higher than shipments (by 15.8 million!) how could there be no inventory at end of 4Q11? But more importantly, how can there be such precise forecasting with so little accuracy in what was predicted the year before? Last year (http://blogs.barrons.com/techtraderdaily/2011/11/11/apple-may-have-delayed-some-iphone-production-says-susquehanna/) Caso predicted production of 28 to 32 million in the fourth calendar quarter. Actual shipments were 37 million. Now he says that production was really 38.5 (vs. his own forecast at the time of 28 million). That's an error of 35%.

If folks think the drop from $700 to $500 was harsh, you aint seen nothin' yet.

But I again IMPLORE EVERYBODY TO IGNORE THE NEGATIVES & BUY AS MUCH AS YOU CAN LONG...Please...BUY BUY BUY...

& be prepared for a very harsh & expensive lesson as you watch APPLES BUBBLE BURSTING MORE & MORE.

But again, the only way folks will learn & see reality for what it is is to BUY LONG & then live & learn...so, PLEASE BUY BUY BUY BUY!!!!

DECEMBER 20, 2012 2:15 P.M.

Will wrote:

Another wasted blog by Barrons. Seems everyday more and more waste comes from this writer.

DECEMBER 20, 2012 2:16 P.M.

Mike wrote:

@Ken I am buying with all I've got! Bad news...you mean bad analysis. Why do you nor anyone else negative on Apple ever answer the question that if demand is so low why are sales in China, its second largest market exploding? Why are Best Buy and Wal Mart sold out? Why was the iphone 5 back-ordered at the Apple store until recently? Why was the opening weekend of the iphone 5 much higher than last years iphone 4s? Why are orders being cut when demand in India skyrocking with a new distribution system? Is Apple trying to create a permanent shortage situation by cutting orders on a product they can't keep in stock...that is the only logical conclusion if you insist production orders are being cut.

DECEMBER 20, 2012 3:06 P.M.

DISCLOSURE wrote:

MAYBE YOU SHOULD MENTION YOUR FIRMS MARKET MAKING CONFLICTS WITH YOUR COMMENTS THAT WERE THE SAME, LAST YEAR AROUND THIS TIME BEFORE THEY HAD A BLOW OUT QUARTER AND THE STOCK WENT UP 200 POINTS.....YOU ARE NOT DOING YOUR CLIENTS SERVICE FOR PUTTING OUT SPECULATION LIKE THAT...

DECEMBER 20, 2012 3:07 P.M.

Anonymous wrote:

Do the fundamentals even matter?

Has the market not given it's verdict, regardless of how much time each of you spend here debating fundamentals and doing silly channel checks?

I believe the verdict is reflected in the chart - it's moving from upper left to lower right.

DECEMBER 20, 2012 4:43 P.M.

David S. Matrecano wrote:

In november 11, 2011 Chris Caso made the same identical call (who also was published in Tiernan Ray's blog) and in that occasion it turned out that Casso it was completely wrong having the iPhone grown that year 132% or so...

DECEMBER 20, 2012 4:47 P.M.

Anonymous wrote:

Who are these guys telling BS stories everyday on Apple. Are they Americans? When do we hear some BS regarding Samsung? But everything is perfect at Samsung they will tell us.

DECEMBER 20, 2012 4:59 P.M.

jrthurm wrote:

I would think Barron's would have respect for its readership than to post such dishonest material. Why T. Ray is allowed to continue on your staff reflects your disreguard for your reputation and character. Your part of the problem with America and I hope the public will get smart enough to applaud your demise.

DECEMBER 21, 2012 8:30 A.M.

Bill wrote:

Why exactly does Caso still have a job after his similar wild ass (wrong, FUDly) guess last year?

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.